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Westpac puts the brakes on SMSF property lending

Emma Rapaport  |  17 Jul 2018Text size  Decrease  Increase  |  
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SMSF property lending

SMSF trustees looking to invest their savings in the property market have suffered another blow following the move by the nation's second largest mortgage lender to withdraw new loan offers.

In a statement issued on Monday, Westpac (ASX: WBC), alongside its subsidiaries Bank of Melbourne, St George Bank and Bank SA, announced it would stop offering loans to self-managed super funds for property investments from the end of July.

Westpac said the decision was made to "simplify" and "streamline" their products.

“We continually review our products and services to ensure they meet the requirements of our customers," a Westpac spokesman said.

"In order to simplify and streamline our self-managed super fund products, we will be withdrawing from sale our SMSF Home Loan product and Business Lending to SMSFs."
Commonwealth Bank (ASX: CBA) is now the only big four lender offering property investment loans to SMSF trustees.

Westpac will continue to service SMSFs with existing investment loans through switching loans and by extending loan maturity.

In an interview with Morningstar, SMSF Association head of policy Jordan George predicted SMSFs may now utilise more of their cash rather than borrowing to buy property.

George also believes the gradual exit of the big four will open the door further to other loans providers, but he adds the SMSF Association would seek to ensure they are adhering to appropriate lending criteria.

SMSF borrowing under the pump

The announcement comes amid a crackdown on SMSF trustees who borrow large sums of money to invest in the increasingly unstable property market.

Labor treasury spokesman Chris Bowen has said the party will consider clamping down on borrowing as part of a larger plan to address housing affordability.

The Productivity Commission similarly took aim at SMSF lending in its latest report on the superannuation sector, saying that while the borrowing is "unlikely to pose a material systemic risk", active monitoring is "clearly warranted to ensure that SMSF borrowing does not have the potential to generate systemic risks in the future."

The number of SMSFs holding limited recourse borrowing arrangements – loans taken out by SMSF trustees from third-party lenders – swelled over the past five years from 4 per cent of SMSFs in 2012 to 9 per cent in 2016, according to figures from the Australian Taxation Office. The average amount borrowed also rose by 4 per cent from $356,000 in 2012 to $372,000 in 2016.

The Hayne royal commission into banking has also cracked down on financial advisers who encourage SMSF trustees to invest in property where it is not in their best interests.

In one notable instance, the commission heard the case of Fair Work commissioner Donna McKenna, who would have lost $500,000 in benefits had she taken the advice of celebrity adviser Sam Henderson, who has since quit the industry.

And about 90 per cent of advice provided to those looking to set up an SMSF fails to comply with the best interests of the applicants, a new report from the Australian Securities and Investments Commission has revealed.

The corporate regulator unearthed cases of people opening up SMSFs with the sole purpose of investing in property, as well as the growing use of so-called one-stop-shops whereby an adviser has a relationship with a developer or a real estate agent whose products the person is encouraged to invest in.

"This put people at increased risk of getting poor advice that did not take account of their personal circumstances or is not given in their best interests," the report stated.

ASIC deputy chair Peter Kell said the standard of advice on SMSFs must improve.

A long time coming

SMSF Association's George acknowledges the regulatory concern surrounding “one-stop-shops” but views increased capital adequacy requirements for investor loans as a key driver behind Westpac’s decision. This, he says, is affecting how banks approach all loans.

“LRBAs are complex products and banks that are looking to streamline the products they offer would look at scaling back LRBA lending given they are a small part of their loan book,” George says. “This has been an ongoing trend in recent years.

“There is an Australia wide trend that lending criteria are being tightened in response to APRA requirements and changes in the property market.”

George cites figures from the Australian Prudential Regulation Authority that show growth in new loans has slowed from 6.6 per cent about a year ago to 5.8 per cent earlier this year. "SMSF loans are part of this picture," he said.

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Emma Rapaport is a reporter for Morningstar Australia

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